You must have come across the term IPO (Initial Public Offering) in the recent news, especially related to IRCTC. Do you really understand IPO and its implications? Why did IRCTC go public and offer IPO? The answer to your questions lie in the fundamentals of the IPO and its working. Let’s review the various aspects of an Initial Public Offering in detail.
What is an IPO?
An IPO or Initial Public Offering refers to the process of offering shares to the public. This is done when a private limited company wants to transition to a public limited company. IPO is offered in a new stock issuance. The value of the IPO depends on the amount of capital that the company wants to raise and the subsequent value of the shares calculated thereafter.
Why Does A Company Offer An IPO?
One of the key reasons behind the transition from a private limited company to a public limited company is the need to raise capital via issuance of shares. However, this transition just cannot happen overnight. For IPO to be executed, the company must reach a stage in its growth process wherein it is mature enough for the regulations and also provides benefits as well as responsibilities to public shareholders. Moreover, the entire process is managed by an investment banker.
The securities market is similar to any other market for goods and services because the concept of demand and supply applies here also. Securities are bought and sold on the basis of demand and supply. In the primary market, companies sell shares directly to public. The sale could either be an Initial Public Offering (IPO) or a Follow-on Public Offering (FPO). An IPO is the first public offer, after an IPO all other public offers are called FPO. In a FPO, public investors have the advantage of knowing more about the company as compared to an IPO.
Offer For Sale Through Stock Exchanges
To help Indian companies increase their public shareholding, SEBI has allowed an additional way through which the promoters of the listed companies can make an Offer for Sale through Stock Exchanges.
The offer for sale can be compared to selling shares on the exchanges through auction. There is a separate window for this which is open during normal trading hours. 100 percent margin must be paid upfront by the bidders and no limit or leverage is usually applicable in this process.
A company needs to prepare itself for an IPO and usually sets up an IPO team in the company for ensuring coordination of all IPO related activities. The team provides timely and accurate information for preparing the prospectus. This team coordinates the entire process and ensures legal compliance.
The key role in an IPO is played by the investment bankers which are basically merchant bankers. They act as advisors to the issuer and take the company through the IPO process. The investment banker appoints all other intermediaries required for the IPO. They also obtain all legal clearances including the clearances from SEBI and stock exchanges. There are multiple investment bankers involved in and IPO and they all act as lead managers. The other intermediaries involved in IPO appointed by the investment banker include
Syndicate members gets the bids for an IPO from institutional and retail investors. Brokers registered with SEBI work as syndicate members for an IPO. They are also known as members of the syndicate. After receiving the bids, bid details are entered into the electronic bidding system and a transaction registration slip or TRS is generated for each and every price. All the money and application forms received by the syndicate members are forwarded to bankers to an issue.
Bankers To An Issue
Bankers collect application forms along with application moneys. They then deliver the application forms to the registrar with detailed schedules providing provisional and final certificates as per the agreement. They also ensure refund of money in case of fully or partly rejected applications. They also assist in post issue reconciliation.
IPO application is supported by ASBA – Application Supported by Blocked Account. When we apply for an IPO the amount for the same is blocked by our bank, which is released to the company after allotment of shares. In case of rejected application, the amount is unblocked back to the bank account.
Registrars to an issue
The registrars process the application forms received in the IPO. They co-ordinate with the bankers to the issue and the investment bankers to complete the processing of applications received and also to complete the post-issue activities on time. They prepare the documents required for allotment of shares and securing approval for listing. They also process data for transfer of funds in case of refund and for the transfer of securities in the DEMAT form for the allotted shares.
Share Transfer Agents help the investors in effecting transfers of shares between the existing holders and the new buyers. Share Transfer Agents on behalf of the company, maintain the records of holder of securities issued by the company and deal with all matters connected with the transfer of securities of the company.
Underwriters agree to subscribe to the securities that are not subscribed to by the public or shareholders in cases of issue of securities. In exchange for this undertaking, they are paid a commission. They can be merchant bankers or stock brokers or other registered underwriters under the SEBI guidelines.
Plan Your Next Steps Smartly
So, the next time you apply for an IPO, know that there are many entities involved in rolling an IPO and issuing you the shares. All the entities are paid appropriate amount by the company, details of which can be found in the offer document. You need to mandatorily have a DEMAT account for applying shares in an IPO. If you are new to stock market there are some guidelines which should be followed for trading. Once you are allotted the shares you in an IPO, you can trade them normally.